US Silica Holdings Inc (SLCA) 2020 Q4 法說會逐字稿

Good morning, and welcome to the U.S. Silica fourth quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Merril, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead. Thanks.

Good morning, everyone, and thank you for joining us for U.S. Silica's Fourth Quarter and Year-end 2020 Earnings Conference Call. With me on the call today is our Chief Executive Officer, Bryan Shinn.

Before we begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that will be made today. Such forward-looking statements may include comments which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company's press release and our documents on file with the SEC.

Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to today's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin.

And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Thanks, Don, and Good morning, everyone. I hope that you and all your loved ones remain safe and healthy as the world continues to navigate the ongoing COVID-19 pandemic. Also, our thoughts and best wishes go out to all of the colleagues, friends and family that we have that have been impacted by the cold weather that has recently swept the country. Through these uncertainties, we've continued to prioritize the health, safety and well-being of our colleagues and have remained focused on following all appropriate health and safety guidelines.

I'm proud of our company successfully navigated 2020 and of our strong overall performance during the year in spite of the challenging macroeconomic environment. Some examples include achieving the best safety performance year that we've ever had and also delivering $200 million in adjusted EBITDA during 2020. We ended the year with approximately $150 million of cash on our balance sheet, generated over $45 million in cost savings to support overall profitability. We maintained fiscal discipline by limiting capital spending to $34.5 million and reducing SG&A by $25 million. That's down 18% from 2019.

We commercialized a number of critical industrial growth products, such as coated diatomaceous earth, cristobalite and cool roof granules. We also expanded our new product pipeline and advanced numerous key projects such as blood plasma filtration, organic pesticides and specialty silica additives. Our team signed several new customer contracts during the year. We estimate that greater than 50% of our industrial revenue and 90% of our oil and gas profit revenue is now under long-term contract.

And finally, we continue to improve manufacturing efficiencies. Plant costs are coming down, railcars in storage are 30% lower sequentially due to scheduled car returns, and we're seeing increased capacity utilization of the cars as well.

Looking ahead to 2021 and beyond, I see a minerals and technology company that is well-positioned for sustainable long-term growth and significant free cash flow generation. We already serve numerous critical industries such as food and beverage production, housing, automotive, glass manufacturing, biopharma and energy. And we have a pipeline of innovative products to serve other high-growth, sustainable markets, including solar energy, wind power, cleaner air, green diesel, food safety and energy-efficient buildings.

Let's move on now to specifics for Q4, starting with the company overview. The U.S. economy is recovering from recent lows. And while the macroeconomic environment remained challenged in Q4, we delivered outstanding results during the quarter. Quarterly volumes increased 26% sequentially, and adjusted EBITDA was $63.6 million, up 24% from Q3, driven by increased profits in oil and gas and a robust industrial segment, which performed better than expected in Q4.

Speaking of industrials, let's focus on that segment for a moment. Volumes of 926,000 tons increased 10% versus Q4 2019 and were only down 3% sequentially. Average sales price was off about 7%, mostly due to seasonal product mix. Contribution margin dollars were almost back to pre-pandemic levels and just 1.8% lower than Q4 2019.

As the economy continued to recover, we increased staffing at key industrial manufacturing sites during the quarter as demand rebounded in important end markets, including corn wet-milling, edible oils, polymer additives and housing. From a geographic perspective, demand was strongest in the U.S. and Asia, while Europe, Africa and Latin America have been slower to recover.

In our Energy segment, we experienced robust demand, with proppant sales volume of 1.9 million tons, up 48% sequentially on stronger West Texas sales and increased Northern White sand volumes. The number of frack crews operating in the U.S. continued to increase in Q4, and we now estimate more than 165 active crews completing wells in the United States.

In response to customer requests, we successfully restarted our Crane, Texas and Sparta, Wisconsin mines during the quarter. Proppant pricing was down 2% sequentially, primarily due to lower spot pricing in West Texas. Sandbox loads jumped 71% versus Q3 as numerous customers increased activity. As a result of overall strong performance, segment revenue and contribution margin dollars increased 81% and 64%, respectively.

I'll conclude my prepared remarks this morning with market commentary. We currently believe that most sectors of the economy are recovering and expect that 2021 will be a good year generally for our customers and also for U.S. Silica. Our current outlook is for a robust recovery in energy sector proppant and last-mile logistics demand and GDP-plus growth in our industrial segment.

Let's look at the details, starting with energy. We're experiencing a strong start to 2021, with surging proppant demand in January. February started strong as well, but has been negatively impacted by the recent unprecedented cold weather causing disruptions last week in West Texas, South Texas and the MidCon as a result of freezing conditions and electricity and natural gas curtailments. We did not suffer any major damage, and our operations and deliveries in these geographies are ramping back up. It's too early to estimate the total impact, but I believe that we will lose several days of oil and gas sales in February to those basins and will incur increased operating, maintenance and start-up costs, as well. Even with all the disruptions, our current forecast is for proppant volumes to increase 15% to 20% sequentially in Q1.

Regarding profitability impact, we expect to make up most of the lost profits later in 2021 as we believe that energy company completion spending will be redistributed throughout the year and also insurance claims will likely offset some of our increased expenses. Further, with some industry experts now forecasting $70-plus WTI pricing later this year, there is potential upside from incremental completion spending, particularly from private energy companies.

We're also off to a strong start in industrials but did experience some weather-related headwinds there, but to a lesser extent in Q1. That said, we still expect Q1 industrial profits to increase 3% to 5% sequentially, with several product lines growing nicely, including filtration, cool roof granules, cristobalite and ground silica. For the year, I believe that we will grow industrial segment profits at a GDP-plus rate, as expected.

And with that, I'll now turn the call back over to Don. Don?

Thanks, Bryan, and Good morning, again, everyone. Let me begin with a review of our operating segment results. Fourth quarter revenue for the industrial and specialty products segment of $106.9 million decreased 3% versus the third quarter of this year, but increased 2% compared with the same quarter 1 year ago. Fourth quarter revenue was driven by some economic recovery but was offset by the anticipated seasonal declines. The oil and gas segment revenue was $120.3 million for the fourth quarter, an increase of 81% compared with the third quarter of 2020 and a decrease of 49% compared with the fourth quarter of 2019. The sequential increase was mostly due to the recovery in the energy space during the quarter.

On a per-ton basis, the contribution margin for the industrial and specialty products segment was $41.47 per ton for the fourth quarter, which is a decrease of 9% compared with third quarter results. This was expected and represents the typical seasonality, and was especially unsurprising after the strong third quarter performance of 2020. The oil and gas segment contribution margin on a per-ton basis was $27.10, an increase of 64% when compared to the third quarter 2020. However, as mentioned in our earnings release, the oil and gas segment contribution margin includes $27.2 million attributed to customer shortfall penalties.

Moving on to full year total company results for 2020. Selling, general and administrative expenses for the year of $124.2 million represents an 18% decrease when compared to the full year 2019. The decrease reflects the concerted effort by the team to reduce spending to better align with business conditions. I should note that SG&A spending in the quarter was $27.8 million, and we expect Q1 of this year to be roughly in line with this. Depreciation, depletion and amortization expense in the fourth quarter totaled $40 million, which was essentially flat compared to the third quarter. We expect depreciation, depletion and amortization to be flat again in the first quarter of 2021. Our full year effective tax rate was a benefit of 34.3% for 2020, and we currently estimate a tax benefit for the full year 2021 in the low 20% range.

Turning to the balance sheet. The company had $150.9 million in cash and cash equivalents and $52 million available under its credit facilities. As previously discussed, our third quarter conference call, we are anticipating the additional tax refunds from the IRS related to the CARES Act. We expect the refund to be approximately $37 million. However, the receipt of these funds remains delayed. Finally, our net debt as of year-end was approximately $1.1 billion.

Capital expenditures in 2020 remained inside our guidance at $34.5 million and were mainly related to our growth projects in our ISP segment, spending to expand our Sandbox operations and other maintenance and cost improvement capital projects. We also expect our 2021 capital spending to be in the range of $30 million to $40 million.

Finally, as we move into 2021, we remain keenly focused on cash, and we are committed to keep capital spending within our operating cash flow. Currently, we expect to be free cash flow-positive for the year. However, we will burn some cash in Q1, as we typically do. Additionally, our cost-cutting efforts in 2020 have made the company more nimble and flexible, allowing us to react quickly to changes, which the market will inevitably throw at us.

And with that, I'll turn the call back over to Bryan.

Thanks, Don. Operator, would you please open the lines for questions?

(Operator Instructions) Our first question today is coming from Stephen Gengaro of Stifel.

So 2 things. I think to start with, if you look at the contribution margin in oil and gas in the fourth quarter, I think it's in the low $12 range, excluding the shortfalls. How should we think about that?

(technical difficulty)

You there, Stephen?

Yes, I'm here. Can you hear me?

Yes. So I think your question is what's normalized contribution margin look like in the oil and gas business, is that right?

Exactly, just because I think we ended up a little over $12 in the quarter, excluding the shortfall revenues. I'm just trying to get a sense for that, especially with maybe some pricing over the next year, but clearly some issues on the short-term with the weather.

Steve, it's Don. You're right, we're in the $12.70 range once you take out the $27 million worth of shortfall penalties. But we had some other kind of run-of-the-mill things that happen at the end of the year, and a lot of those year-end adjustments were favorable, right? So we did have some really nice tailwinds on that, as well, that probably accounted for roughly about $2 a ton. So when you look from a normalized perspective, you're probably in that $10 range coming out of Q4.

And just to elaborate a little bit more going into Q1, we're seeing some really nice volume growth on the proppant side, but with growth comes cost, right? So we're starting up a couple of our plants, specifically Sparta and Crane. We also are pulling a lot of railcars out of storage, and that's pretty pricey because you're taking railcars out of storage with no product in it, right? So you're paying a little bit more for that. So you probably have another $1.50 to $2 there going into Q1. You always get the cost before you get the profit, right, so you'll see a little bit of drag on Q1 and then getting better as the year goes up.

And then, the other question. So from a bigger-picture perspective, you guys did a really good job, I thought, with the ISP discussion in December. And I know it's early, but if you look out to 2023, '24, is it a situation where the volumes may be up a bit but the contribution margin per ton and the pricing, because of the higher-end products in ISP, will generate contribution margins that are materially higher? Or is it a volume and a contribution margin? I'm trying to just get a sense for the big drivers of longer-term profitability in ISP.

It's a really interesting question, Stephen. And I think it's, as you said, kind of from a big-picture standpoint, I feel like we're transitioning from more of a bulk material supplier, which has been kind of where we've been for a century-plus, to more of a specialty, kind of highly processed minerals and ingredient supplier.

And so as we make that transformation over the next several years here, I think what you'll see is that revenues and profits will go up a lot faster than volumes. Or said more plainly, we'll probably be shipping less things in railcars and more things in smaller containers. So a lot of the new products that we have under development are much lower volumes, but sell for 10x, 50x, 100x in price what we have today.

And one of the advantages of that is that these are truly specialty products, which, quite frankly, once we get into an application and get specified in, it will be very hard to specify out, and some of them are fairly unique products, as well. So I think you'll see less volume growth, per se, and more revenue and profit per ton. So if you look at contribution margin, for example, we've got some products in the pipeline that have contribution margins of $500 a ton, $1,000 a ton. Some of them we actually are measuring in dollars per pound, but now instead of dollars per ton. So that's just kind of a flavor for the type of things that are coming through the pipeline.

Our next question is coming from Connor Lynagh of Morgan Stanley.

Wondering if you could give us sort of a feel for the supply side out there on the oil and gas business. Certainly, demand is picking up with frack activity. I guess what I'm trying to get a feel for is, is there incremental pricing required to bring back idled mines? Do you think there's substantial reactivation underway already? If you could just give us sort of your feel on maybe compare and contrast Texas and the northern regions?

It's a really interesting question. And if you look at what happened in the pandemic sort of downturn of 2020, you saw a lot of companies do exactly what we did, which was take some mines almost completely off-line, and then others got turned back and started running at, say, less staffing levels. And so if a mine could do 1 million tons, maybe it was only staffed for 200,000 or 300,000, or something like that.

So what we've seen as demand has come back very strongly here, we've seen that second category, the ones that, quote-unquote, got just “turned down”;, kind of get turned back up, if you will. And so we have re-staffed, for example, our [idle] mine back to 24/7 operation. So that's relatively easy to do. And our West Texas mines, Crane and Lamesa, we were able to restaff those as well.

I think we'll hit a point here pretty soon where you can't just sort of turn back up the mines that were turned down, and it will come to actually reactivating mines that have been shuttered. And what we've seen out there, actually so far is surprisingly perhaps to some, is a fair amount of discipline amongst the supplier base. And I'm aware of several examples where customers have gone to ourselves and to competitors looking for additional capacity. And I think the competitors and us are looking for long-term contracts at reasonable prices to restart mines. We've already gotten a lot of those contracts. Others perhaps are to come.

So I feel like there's a bit of discipline out there right now. And it certainly does take some incremental pricing to get those mines reactivated. As Don was saying earlier, talking about our contribution margin for oil and gas in response to Stephen's question, there's upfront cost to reactivate the mines, and so you have to dig a bit of a cash hole when you start those back up. So I think most people in the industry are looking for some incremental pricing to be able to do that.

And then, specifically in that comment, Don, you were talking about, are you guys contemplating any incremental price in 1Q versus 4Q? And regardless of that, should we expect more as we move into, say, 2Q?

So I feel like things will get a bit more constructive out there. We've already seen some opportunities to get pricing. It's a bit of an interesting dynamic. We had a lot of negotiations with our customers in Q2 and Q3 of last year and gave some pricing concessions in those quarters as needed to support the customers. And now, I think we could quickly be coming to an environment in the first couple of quarters here of 2021 where things have flipped a bit, and we're tightening up pretty substantially. We've seen some prices go up a bit already. And certainly, with WTI screaming up into the $60s, and I know we've all seen the forecast from some of the leading prognosticators out there saying that WTI could get into the $70s by summertime of this year, if that happens, I feel like there'll be some reasonable opportunities to get price.

(Operator Instructions) Our next question is coming from J.B. Lowe of Citi.

Just kind of a question on the competitive landscape. As some of your competitors have exited bankruptcy, were you guys able to take some market share over the last couple of quarters? And how do you think that the competitive landscape is kind of set up now that you've seen some of your competitors kind of re-emerge here?

So I think we have been able to gain share in oil and gas and in the industrial sector, as well. We've had a number of customers approach us, started in 2020, quite frankly, looking for additional supply. And it's not just from the competitors who went through bankruptcy. But I felt like there was just kind of a general concern around the health of our industry, and customers saw us as the strongest player out there from a kind of stability and strength standpoint.

And so we've been able to sign a lot of new contracts. Just in this previous quarter, Q4, that we're talking about here this morning, we signed in the industrial business, for example, 14 new contracts from customers. And we're continuing to increase the amount of contracted volume that we have out there. We're well over 50% of our industrial business that's under long-term contract. And we're typically somewhere between, depending on the grade of product in the Basin, et cetera, 80% to 90% in oil and gas.

So I think it certainly has helped us, just the kind of disruption that was created in the industry with the bankruptcy there. If you kind of step back and look at it, 3 of our largest competitors, in the oilfield, anyway, went through bankruptcy last year. And so I feel like customers were sort of fleeing to safety and to quality when they would choose us. So our team has done a really nice job of getting additional volumes locked up under contract here over the last 12 months or so.

And just a follow-up. Do you guys expect to get any shortfall payments in 1Q?

No. Right now, “we don't know” is the answer, but right now, I would say that we're not anticipating anything of a material nature in Q1.

Yes. We would hope that, especially in this environment, that our customers are going to buy all the contracted tons. Things are pretty tight out there, and there's days where, especially with some of the recent weather issues, we know customers are scrambling, looking for product out there. And to the question earlier that came from Connor around pricing, all that feels like it's constructive for a pretty positive environment for oil and gas demand, for sure, as we go into 2021 here.

I guess just a follow-up on that. I mean, I understand the costs on the ramp-up side are going to hit Q1. But do you think 2Q contribution margin on the O&G side, given those dynamics, could get back to the 4Q adjusted level of near $13 million?

I would expect that we'll see a rebound in Q2. I think there's a couple of things there. As Don said, we'll be through some of the cost issues from Q1. We didn't talk about the whole sort of weather thing yet. I mentioned it in my prepared remarks, but I think that will definitely be a bit of an impact here for us in Q1. But my expectation is that, especially as volumes continue to ramp, we should be able to have some tailwinds on our cost. I think we'll have opportunity to get some pricing.

So I'm feeling pretty positive about margins increasing from Q1 to Q2 at this point. Obviously, still a lot of unknowns. But, given that a lot of the operators out there weren't able to finish their completions or had to stop their completions in February because of weather, I feel like some of that work is going to push into Q2. And it's going to put even further strain on what looks like a pretty tight market right now for sand proppant into the oilfield sector.

Our next question is coming from Lucas Pipes of B. Riley Securities.

My first question is on the specialty materials side. And I wondered if you can give us a little bit of a sense of how large the addressable market is. You mentioned the revenue price per ton potential is very attractive. So I wondered if you could maybe frame up the kind of total market opportunity? And then, also, kind of who would you be competing with in that segment?

So it's really fascinating, Lucas, and it's one of the things that I really get excited about when I think about our industrial business. If you look at how we've defined the business over more than a century, it tended to be pretty focused on the sand dynamics and a lot of the same end uses that we've traditionally been in glass manufacturing, foundry, et cetera. One of the really cool things about what we see as the future of our industrial business is we're going beyond the markets that we sold into and looking at completely new markets and end uses. And I see our competitive set now is not just sand, but a lot of other specialty minerals and products. And so when you start thinking about what that opens up, I mean, literally, it's billions of dollars' worth of market space that we can go after.

There was some information that we put together. Some of you might have seen a presentation in December when we had our industrial-focused investor call. You check out that presentation, find it on our website. Obviously, you can see some of the markets there. And some of the markets range, addressable size, from $100 million to $150 million, and some are literally in the billions.

And so at its core, what we're trying to do is take one of the minerals that we have, or a mineral that we can get access to, perhaps do some processing to it, coat it, heat it, do a variety of things to it and transform it into something that can compete in completely different market sectors; and in many cases, do it with either an advantage in performance or an advantage in manufacture cost. So I think that's really exciting as we look at that potential for the future.

And then turning back to the energy side. There's been a fair bit of consolidation among service providers, but then also among a lot of producers. How do you think this is impacting the competitive dynamics kind of as you re-emerge from this downturn?

I think that dynamic actually is one of the most beneficial things that's happened for us. My experience in selling into a lot of industries over more than 3 decades is that big customers like to do business with big suppliers. And so the larger the customers get, I think the more they're looking for companies like us who can supply them across multiple Basins, multiple locations and have the sort of wherewithal to match up with those companies and be able to respond quickly to meet their needs.

So you see the largest folks in the industry now coming to us, and there are some of the customers, in some cases, ones that maybe we didn't do business with the 2 or 3 entities that were kind of small to mid-sized companies, as they were separate. But as they're coming together now, they're rethinking their sourcing strategy and their kind of vendor partnership strategy. And we've really been the beneficiary of that. I mentioned earlier in the call about all the new contracts that we've signed. And I think several of those have been as a result of some of these larger entities forming and going out and really rethinking how they want to partner with their suppliers.

At this time, I'd like to turn the floor back over to Mr. Shinn for closing comments.

Thanks, operator. I'd like to close today's call by reiterating a few of the key points that we talked about. First, I'm very proud of how our company successfully navigated 2020 and of our overall strong performance during the year in spite of the challenging macroeconomic environment. Second, we started the new year well in both of our business units, and I believe we're positioned for really good success in 2021 and beyond with numerous growth opportunities in our pipeline, as we discussed a bit this morning. And of course, those are across a diverse set of markets and end uses. And then finally, with improving profitability and continued CapEx discipline, we expect to be cash flow positive this year, as Don mentioned in his remarks.

So thanks, everyone, for dialing into our call today, and we look forward to speaking with you all again next quarter.

Ladies and gentlemen, thank you for your participation and interest in U.S. Silica. This concludes today's event. You may disconnect your lines or log off the webcast at this time. Thank you.